Italian Stock Exchange: Code of Conduct Compliance Does Not Guarantee Efficiency

What do we know of the governance of Italian businesses, more than a decade after best practices were self-imposed with the Code of Conduct of Borsa Italiana? As far as listed companies are concerned, the answer would probably be: we know everything. For years, the majority of companies listed on the Italian Stock Exchange, like in every other industrialized country, have produced reports on the characteristics and rules of composition of the board and its committees, and the functioning of shareholders' meetings. For their part, legal and corporate offices of listed companies, as well as the secretariats of the boards of directors, have developed sophisticated skills to diligently interpret requests coming from regulators and investors' associations (Consob, the Italian Stock Exchange, Assonime etc.).

Moreover, board members themselves, especially if independently appointed, seem to have been chosen for their expertise in issues of regulation and regulatory compliance, rather than for their business skills. In recent years, this has led to a review of the composition and structure of corporate boards modeled on the requirements of the code of self-discipline. Looking at 2013 Assonime data on corporate governance, in 70% of cases board members are non-executive directors of listed companies, of which more than half are independent from either property or management, with a growing importance of women due to the gradual application of the law 120/2011 on gender quotas in company boards. Similarly, it appears that the number of cases where the roles of President and Chief Executive officer overlap have decreased (the cases of CEO duality are now only 30%), while nearly 9 out of 10 listed companies have formed committees within the board of directors both for internal risk control and the review of managers' compensation.

The impression, however, is that while on the one hand the change in Italy's company boards is there for all to see, on the other there are at least two important questions that remain unaddressed. First, how much of this virtue by numbers is reflected in actual company behavior? In other words, how much formal compliance weighs vis-à-vis dealing with more substantial issues of corporate governance? And has better governance improved the performance of Italian public companies?

As regards the first question, the distinction between good corporate governance and corporate governance that just complies with the requirements of the code of conduct is often very difficult, and, moreover, it can be made only through the analysis of the soft assets of a corporation, something Italian listed companies rarely report on. These qualitative aspects, rather than board members' attendance statistics, are what really matter, especially for companies that have so far strictly limited themselves to formal compliance. Among them, the attainment of real independence and competence on the part of the board; the search for the optimal fit between the composition of the board and the strategic needs of the company or group; the search for a constructive dialogue with the controlling shareholder, while preserving strong autonomy in managerial decision-making.

Has the actual governance of private enterprises improved? We know that there is still much to do. Despite the fact that the crisis has forced Italian businesses to seek external shareholders and new management structures in industries that have gone all global, in order to have the right skills to service emerging markets, there is lack of awareness about how good governance can represent the best guarantee to successfully deal with this delicate transition. Italians need to make a cultural shift, so that the country's entrepreneurs can look with professional detachment at their companies, with a shareholder's eye, so as to boost their growth. Internationalization and professionalization of top management, and the listing on the stock exchange are all essential steps. Because small, unfortunately, is no longer beautiful.